International trade increases the number of goods that domestic consumers may choose from. Through increased competition cost of these goods should fall. Free trade for all its benefits is not widely accepted by the Trump presidency. The President has been on a anti-trade warpath from his campaign to his election. He followed up that with tariffs on solar panels, washing machines, steel and aluminium. As a businessman, the speculation is the President is using the tariff card to procure better trade deals with Canada, Mexico and even Europe. With China, it is perhaps, to persuade China (as suggested by Martin Feldstein of Harvard University) to abandon its policy of “voluntary” technology transfers imposed on U.S. firms for goods exported to China.
A tariff is a tax that adds to cost of imported goods and these are “rightfully” used to protect infant industries in developing economies. The five top reasons for tariffs to be implemented include:
i. protecting domestic employment;
ii. protecting consumers;
iii. infant industries
iv. national security; and
v. retaliation.
There are several types of tariffs and trade barriers that a government may employ:
Who Benefits?
No one? In the short term, higher prices reduce consumption but governments will see an increase in revenue. In the longer-term, there is a decline in efficiency, market share is lost eventually, the businesses suffer losses and a foreign entity takes over on favourable terms (e.g. Proton). For the government and people, a perpetual subsidy mentality leads to budgetary deficits and less disposable incomes.
Bottom Line?
Free trade benefits consumers with better choices and reduced prices. Protecting industries for a limited period may be helpful for a developing economy. But the problem is “infants” seldom want to be weaned-off their “milk”. So it is a delicate balance between pursuit of efficiency and providing employment to a protected business/industry.
A tariff is a tax that adds to cost of imported goods and these are “rightfully” used to protect infant industries in developing economies. The five top reasons for tariffs to be implemented include:
i. protecting domestic employment;
ii. protecting consumers;
iii. infant industries
iv. national security; and
v. retaliation.
There are several types of tariffs and trade barriers that a government may employ:
- “Specific tariffs’ – a fixed levy on one unit of important item.
- Ad valorem tariffs – a percentage of a good’s value.
- Licenses – like an approved permit for foreign cars.
- Import quotas – restriction on amount of a particular good that can be imported.
- Voluntary export restraints (VER) – levied at the behest of the importing country. May lead to reciprocal VER.
- Local content requirement – a percentage of a good be made domestically. For example, production of a car requires 50% domestic content.
Who Benefits?
No one? In the short term, higher prices reduce consumption but governments will see an increase in revenue. In the longer-term, there is a decline in efficiency, market share is lost eventually, the businesses suffer losses and a foreign entity takes over on favourable terms (e.g. Proton). For the government and people, a perpetual subsidy mentality leads to budgetary deficits and less disposable incomes.
Bottom Line?
Free trade benefits consumers with better choices and reduced prices. Protecting industries for a limited period may be helpful for a developing economy. But the problem is “infants” seldom want to be weaned-off their “milk”. So it is a delicate balance between pursuit of efficiency and providing employment to a protected business/industry.
Source: The Basics of Tariffs and Trade Barriers by Brent Radcliffe (www.investopedia.com)
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